Correlation Between Eaton PLC and Illinois Tool

Can any of the company-specific risk be diversified away by investing in both Eaton PLC and Illinois Tool at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Eaton PLC and Illinois Tool into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Eaton PLC and Illinois Tool Works, you can compare the effects of market volatilities on Eaton PLC and Illinois Tool and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Eaton PLC with a short position of Illinois Tool. Check out your portfolio center. Please also check ongoing floating volatility patterns of Eaton PLC and Illinois Tool.

Diversification Opportunities for Eaton PLC and Illinois Tool

-0.37

Correlation Coefficient

Eaton PLC  Illinois Tool

Very good diversification

The 3 months correlation between Eaton and Illinois is -0.37. Overlapping area represents the amount of risk that can be diversified away by holding Eaton PLC and Illinois Tool Works in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Illinois Tool Works and Eaton PLC is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Eaton PLC are associated (or correlated) with Illinois Tool. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Illinois Tool Works has no effect on the direction of Eaton PLC i.e., Eaton PLC and Illinois Tool go up and down completely randomly.

Pair Corralation between Eaton PLC and Illinois Tool

Considering the 90-day investment horizon Eaton PLC is expected to under-perform the Illinois Tool. In addition to that, Eaton PLC is 2.11 times more volatile than Illinois Tool Works. It trades about -0.09 of its total potential returns per unit of risk. Illinois Tool Works is currently generating about 0.0 per unit of volatility. If you would invest  25,333  in Illinois Tool Works on December 29, 2024 and sell it today you would lose (137.00) from holding Illinois Tool Works or give up 0.54% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

Eaton PLC  vs.  Illinois Tool Works

Eaton PLC

Risk-Adjusted Performance

Very Weak

Over the last 90 days Eaton PLC has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of abnormal performance in the last few months, the Stock's basic indicators remain very healthy which may send shares a bit higher in April 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

Illinois Tool Works

Risk-Adjusted Performance

Very Weak

Over the last 90 days Illinois Tool Works has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Illinois Tool is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with Eaton PLC and Illinois Tool

The main advantage of trading using opposite Eaton PLC and Illinois Tool positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Eaton PLC position performs unexpectedly, Illinois Tool can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Illinois Tool will offset losses from the drop in Illinois Tool's long position.

The idea behind Eaton PLC and Illinois Tool Works pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.